Source: Adrian Day 05/10/2022
In today’s Bulletin, analyst Adrian Day reviews the recent results from the big three royalty companies, all strong, with rock-solid balance sheets, but with a shortage of large projects in which to invest.
The big three royalty and streaming companies reported last week, though there had been pre-announcements to various extents. All three had good quarters, reporting close to expectations, and maintaining annual production guidance. All three have undertaken small transactions in recent months, though no large ones. And all three are now debt-free, with rock-solid balance sheets.
Wheaton Has Higher Production in Sector
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) reported broadly in line with expectations, though sales were a little stronger on slightly weaker production, due to sales from inventory.
Production was affected by maintenance and heavy rains at its largest streaming asset, Salobo. The expansion at that mine is now 90% complete, and Wheaton reiterated its guidance for the year of between 700,000 and 760,000 gold-equivalent ounces (GEOs).
Debt-free, Wheaton increased its cash balance to $376 million, with liquidity of $2.4 billion.
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All of the “big three” royalty and streaming companies are long-term holdings for us and form the foundation of our gold portfolio.
Under its dividend policy of distributing about 30% of the prior year’s free cash flow, the dividend remains for the next two quarters but may increase thereafter; the current yield is 1.36%. If you do not own Wheaton, this is a good price level, but, given the near-term uncertainty on the gold price, we would look for additional weaknesses to add.
Franco’s Oil Boosts Revenues
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported slightly higher than expected, mainly due to better-than-expected oil and gas revenues. It maintained its full-year guidance of between 680,000 and 740,000 GEOs (which now include oil and gas). Like Wheaton, Franco did a few small transactions in the last couple of quarters, but no large deals. Also like Wheaton, Franco has some growth “baked in” from existing assets, in its case the ongoing ramp-up at its largest asset, the gold stream on the Cobre Panama copper mine.
Franco has $1.7 billion in available liquidity, including $723 million in cash and no debt. Franco remains a core holding, but we would look for additional weaknesses before buying, especially if the broad market is weak.
Royal Pays Off Debt
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) also reported slightly better than expected, due in its case to higher gold from its major asset, Mt Milligan. It is maintaining its full-year guidance of between 315,000 and 340,000 GEOs. Like the other two, Royal has built-in growth this year, from the ramp-up in the new Khoemacau copper mine in Botswana, on which Royal has a silver stream.
Having paid off its debt in the last quarter, it too is debt-free, with $184 million in cash, and $1 billion on its credit facility. Royal’s stock had the largest increase earlier in the year—for a reason—and has retreated less. We would wait to add to positions.
Expensive for a Reason
The royalty and streaming companies tend to be expensive, with valuations multiples above the miners. But the balance sheets are stronger for the most part, with the certainty of cash flow higher and the exposure to inflation—as well as other costs and risks—lower. At today’s prices, Wheaton is trading lower than Franco on all metrics: 3.1 times price-to-book versus 3.7 times; cash flow of 24 times vs 30; and free cash flow 66 versus 74. Royal, at 19 times, is lower on cash flow, and in the middle on price-to-book at 3.4 times. Royal is the smallest of the three, with a market cap of $8.5 billion with Wheaton at $20 billion and Franco at almost $29 billion. Franco has the highest cash, the most diversified portfolio, and the deepest pipeline, but all three rate highly on all these criteria.
All of the “big three” royalty and streaming companies are long-term holdings for us and form the foundation of our gold portfolio. We are holders, but looking for lower prices to add.
Barrick, With a Strong Balance Sheet, Doubles Payout
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) already pre-announced production and other financial results (Bulleting #818 and #819), so their quarterly results did not have many surprises. Although production was down in the quarter, they remain on track to meet their full-year guidance. The first quarter is usually a lower one for production, while the second quarter is always lower in terms of free cash flow since the quarter included semi-annual bond payments as well as additional tax payments.
There are near-term increases expected from the restart of Porgera (with the restart now pushed back to the third quarter); then increases from the planned expansion at Pueblo Viejo; and lastly the giant Reko-Diq copper project in Pakistan. Costs, as we discussed, were higher than expected. With Barrick already increasing guidance for 5% above earlier estimates, it is now estimating an additional 3% or so to costs. Some of this comes from higher royalty payments as the price of gold increases, but though Barrick is controlling costs well, inflation will affect them, as it will all miners.
The company has a very strong balance sheet, with net cash, boosted recently by the receipt of $300 million in dividends from the Kibali mine in the DRC. S&P upgraded its debt to BBB+. Including $3 billion undrawn on its credit facilities, it has total liquidity of $8.9 billion. Although it bought back no shares under its new repurchase program—which the company seems to view as a contingency, for extraordinary circumstances—it did increase the dividend under its new policy, effecting doubling it, putting Barrick on track for a sector-leading 3.6% yield. (Only B2Gold has a higher yield, just over 3.7%.)
Barrick is one of our top picks among the major producers. If you do not own it, it can be bought here. Much depends on the direction of gold for the near-term stock price, of course, and we would look to add to positions on weakness.
Transaction for Vista’s Project Nearing
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) has completed its 26-hold drill program at Mt Todd, looking for connecting structures between the two main ore bodies, with assays pending. Such drilling can increase the size of the project, but the major focus now is on seeking a partner for some kind of transaction. The company has $12.8 million in cash, and with the completion of the exploration program at Mt Todd, the total spend rate is expected to fall to $1.5 million a quarter. The cash should be sufficient to take the company through to a transaction. CEO Fred Earnest said he expected a transaction that would answer how the project will be financed, “a very important catalyst for unlocking value.”
TOP BUYS this week include, in addition to above, Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE); Altius Minerals Corp. (ALS:TSX.V); Midland Exploration Inc. (MD:TSX.V); Ares Capital Corp. (ARCC:NASDAQ); Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE)); Orogen Royalties Inc. (OGN:TSX.V); and Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ).
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Originally published on May 7th, 2022.
Adrian Day, London-born and a graduate of the London School of Economics, is the editor of Adrian Day’s Global Analyst. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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